Small Businesses Might Have Big Headaches

It will be tougher for laws benefiting small businesses to pass Congress, say knowledgeable Washington, D.C., observers. After 12 years of Republican control of the House and Senate, Democrats now have the clout to affect civic and business life, following the 2006 midyear elections’ dramatic results.

What does this shift mean for jewelers and other small businesses? JCK recently asked five lobbyists who work on behalf of retailers, small business, and the jewelry and watch industries. They are: Roderick A. DeArment, former chief of staff of the Senate Finance Committee, a former Undersecretary of Labor, and now a senior partner at Covington & Burling; Brad Close, director of federal public policy for the National Federation of Independent Business; Robert Green, vice president for government and political affairs for the National Retail Federation; Timothy Haake, retired Army major general and legislative counsel for 12 years for Jewelers of America; and James Musser, legislative counsel for the American Small Business Association.

They assessed the legacy of the 109th Congress, including why important issues—like plans to control small business’s soaring health insurance costs—failed to pass the supposedly pro-business 109th. They also speculated on which business legislation is most likely to pass this Congress and explained why the luxury tax may make a comeback.

Many expected the 109th Congress to be the most pro-business in decades, yet bills like relief for small businesses’ health care costs and permanently ending the estate tax failed. Why?

TH: The answer is in the Senate’s rules. Republicans, while controlling House and Senate, never had the super majority [60 seats] to shut down opposition. As for association health plans, big health insurance companies were largely responsible for blocking that in the Senate through their advocates, who were largely Republican.

RG: There were some significant accomplishments in the 109th beneficial to business, like bankruptcyreform, the free trade agreement, and repeal of the Byrd Amendment [which encouraged abuse of trade antidumping laws]. Also, what’s not done can be as important as what is. The overall climate in the 109th was positive. In this new Congress, there will be more oversight of business, both large companies and small.

In terms of legislation useful or important to small business, what grade (A to F) would you give the 109th Congress?

JM: A B– or C+. It enhanced expensing for small business, for example. The House earned better marks than the Senate for attending to small business concerns. The Senate was the killing ground. Small business always takes a hit there.

RG: A B. It passed a couple of big issues important to retailers. One was federal bankruptcy law reform, making consumers more responsible for their debts and reducing retailers’ exposure to it. Another was reform of class-action suits, which all retailers face in growing numbers. It put limits on them, especially frivolous ones, changed how they’re filed [in federal court instead of state], and who could file them.

TH: An A for pro-business legislation, much of it passed just before Congress adjourned. There were extensions of tax credits and cuts, especially accelerated depreciation for leasehold improvements, which small businesses can write off over 15 years. That’s extended to Dec. 31, 2007, as are tax credits for hiring those needing work. Small-business expensing [writing off $100,000 per year] was extended through 2009.

Congress raised the annual tax-free contribution to health savings accounts (HSAs) from $2,700 to $2,850, giving businesses more incentive to set them up for employees. HSAs help small business tremendously with employee health care. A provision in the extension of the Generalized System of Preferences [duty-free treatment for developing countries exporting to the United States] to exclude India and Brazil (important gemstone countries) was modified to include them.

How will Democratic control of Congress affect small businesses legislation?

JM: The bottom line for small business in the Democrats’ big win in the 2006 midterm elections is that things are now tougher. We must protect what we have.

BC: Some issues, like making the president’s tax cuts permanent, will be more difficult. Others, like alternative minimum tax (AMT) relief, are priorities of the new Congress. Also, Section 79 expensing has enjoyed wide bipartisan support. We hope Congress continues to support this important tax issue for small business.

RD: The dramatic shift means there’ll be pressure to raise business taxes. We don’t believe the new majority wants to roll back the Bush tax rate and capital gain cuts. Democrats are mindful of the “tax increaser” label and also are eyeing the White House in 2008. Nevertheless, we expect they’ll readopt “pay-go” rules, so a tax cut is balanced by a same-size tax increase. That may shift the taxation burden toward business and upper-income taxpayers, as Congress seeks “loophole clauses” and “revenue enhancers” to offset popular tax cuts.

RG: The Democrats hold the House by a small number and the Senate by only two seats. On important legislation, consensus will be needed, and we’ll have the opportunity to make our case. We expect quick enactment of a minimum wage increase; raising costs for small retailers, who are more sensitive to it; and possibly efforts to expand the Family Medical Leave Act [12 weeks of unpaid leave at companies with 50 employees or more] to 25 employees or even 15, affecting many small retailers.

TH: Passing pro-business legislation will be more difficult. Democrats aren’t insensitive to small business but see it and its support groups as largely Republican or Republican-leaning. Then, there’s the so-called “tax gap” [unpaid taxes owed the government]. Purportedly, the largest abusers include small business owners. The new chairmen of the Senate Finance Committee and the House Ways and Means Committee, and the Internal Revenue Service commissioner all say it needs attention. Some proposals call for credit card companies to report payments to vendors so the IRS can compare that with what a retailer declares. With rising deficit spending—due to the war and Democrats needing more money for social programs—a revised tax reporting system could pass this year.

Mandatory health coverage for employees is something that may have a resurgence. And Social Security faces bankruptcy by 2021. Congress may address it now or after the 2008 election, but it’s coming, and businesses will pay more for employees’ retirement.

What legislation useful to small business will most likely pass this Congress?

JM: There’s a glimmer of hope for the AMT. Originally designed to make the very rich pay taxes, it was never indexed for inflation and now bites more and more into the middle class. Many small-business owners, especially family-owned ones, single proprietors, and small partnerships, are hit hardest. They’re usually found in the Northeast and West Coast, which tend to be more Democratic. The cost to fix it is enormous, but Democrats have an incentive, because it affects so much of their constituency.

BC: A top priority of Rep. Charles Rangel, D-N.Y., chairman of the Ways and Means Committee, is reforming the AMT, which increasingly hits middle-class taxpayers, including small businesses. Fixing it would have a huge, positive impact on small business.

RD: By 2010, about half the taxpayers in the $75,000–$100,000 income range will be subject to the AMT, so modification or repeal is high on the Democratic agenda. However, repeal would cost $1.3 trillion over 10 years, which isn’t easy in a “pay-go” environment. So, we believe the current short-term AMT fix [$58,000 exemption for married couples, allowance of nonrefundable personal credits against the AMT] will be extended.

What’s the most important issue you’ll lobby for in this Congress?

BC: The top concern of small businesses is health care reform. They desperately need relief, so affordable, accessible health care is our No. 1 priority.

JM: If Democratic leaders’ statements reflect what the 110th intends to do, a minimum wage increase, tax hikes, and another attempt at a government-run, universal health care system are on the agenda, and small business priorities like health plans or estate tax repeal are off. Rangel says there isn’t a Bush tax cut he wants to keep. He also wants to roll back capital gains tax cuts. So, small business is in a defensive posture for the next two years, as Democrats look for dollars to finance rollbacks.

TH: Congress will be in a deficit-spending mood. Democrats seek money to aid needy people and the payers tend to be business and wealthy people. So, success in the next two years will be measured in keeping the status quo, without more taxes and more reporting requirements laid on small business.

RG: There are several important issues. One NRF priority is establishing parity for retailers, usually smaller ones, who own their properties and have an improvement depreciation schedule of 39½ years, with those who rent and have only 15. Another is the interchange fee merchants must pay on credit card transactions. We want more transparency on how they’re set. The rules aren’t clear. Another issue concerns data security and identity theft. Some proposals require retailers to take extreme steps to inform customers. That could have a disproportionate impact on small retailers.

On a scale of 5, with 1 most likely and 5 least likely, rate the chances of passage for some proposals in the 110th Congress’s two years, starting with association health plans.

JM: A 4 at best. I can’t imagine it passing in the present situation.

RG: I say 5. Health care reform is important, but in this politically challenging environment, it’s a long-term priority. So, we’re engaged in discussions with retail CEOs, including a task force of them, for market-based proposals to take to Congress, which is talking more about health care. We’re getting to a tipping point there [when action is possible], but likely not until after the 2008 presidential election.

TH: I think it’s a 2 or a 3. In the 109th, this died in the Senate, because some Republicans joined Democrats to block it. Now, they’re gone or keeping their heads down. Since this is really a bipartisan issue, we should approach the new leadership, and say, “This is something we need.”

How about permanently ending estate tax?

JM: A 5. It won’t happen. One thing that could, in the Senate, is linking passage of a minimum wage increase to a permanent reduction of the estate tax and a sizable exemption. That would protect many small businesses.

RD: A 5. The election results doomed any hope in the foreseeable future. Under current law, the estate tax phases down to a 45 percent rate in 2009 with a $3.5 million per person exemption. In 2010, there’s complete repeal, followed in 2011 with restoration to the old 55 percent rate and $1 million per person. Many Democrats want a compromise to prevent dislocation after a year of repeal. So, we expect in 2007 to see Democrats try to enact a permanent solution—a $3.5 to $4 million exemption and a 40 to 45 percent rate.

RG: A 5. There are discussions about permanent relief, but not repeal, but dollars and cents affect this, too. It’ll probably be debated, with no action in this Congress.

TH: A 5. Democrats see it as a giveaway to the rich, so it won’t happen. However, some Democrats do support reduction, so compromise is possible, but probably not until after the presidential election, when the new president and Congress face a return to the higher estate tax rates in January 2011.

Will we see a luxury tax?

RD: A 3. Under pressure for revenue offsets, the new Congress will likely revive proposals to eliminate perceived loopholes used by business and the rich. So, the idea of luxury taxes may reemerge. One was last enacted in 1990 on boats, furs, and jewelry (including watches) and took three years to repeal. Congress learned luxury taxes don’t collect as much as predicted and have a devastating effect on employment in some industries. But, turnover in Congress allows bad ideas to resurface. We must be vigilant and educate new members. Fortunately, incoming chairman Rangel of Ways and Means has been around long enough to remember dislocation caused by past luxury taxes.

JM: A 3. Democrats need lots of revenue to offset things like AMT relief, so a luxury tax will be discussed. Whether it goes further depends on whose voice is loudest.

RG: It’s a 3 or 4. Democrats need revenue, and the climate for tax increases is more favorable now than under the Republican majority.

How about a national sales tax?

JM: A 4. It’s unlikely to get needed votes in the Senate. Maybe in the House, but that’s questionable. Even if one got through, the president has his veto pen.

RG: A 5. We’ve done a very good job at the NRF educating Congress on the economic impact, and we hear the Democratic leadership doesn’t favor one.

TH: A 5. That was a Republican initiative, but it’s regressive. It takes a larger proportion of the poor’s discretionary income than it does the rich. The progressive tax system now gets 97 percent of taxes from the top 20 percent of wage earners. The bottom 20 percent pay zero. Democrats won’t mess that up.

Any final thoughts?

JM: Small businesses must work hard now to protect themselves. We could count on the Republican Congress, which had small business owners in it, not to do anything damaging to small business. Now, we must protect ourselves from bad legislation. So, it’s very important to join with fellow businesspeople in trade associations to do so.

TH: We had a positive environment in Washington for quite a while. Now we must be diligent and reach out to the new congressional leadership, developing relationships so that we can help shape debates on issues before they become legislative initiatives. Jewelers can be an early warning system, interacting with and alerting their local elected officials.

RG: It’s important that retailers be involved in the political process, following what Congress does, staying in touch with their elected officials and engaging with them, when needed. We’re most successful [lobbying for retailers] when the industry is engaged and smaller retailers participate. Good things can happen then.